Full episode: Market Call for Wednesday, February 7, 2018
Paul Gardner, partner and portfolio manager at Avenue Investment Management
Focus: REITs, bonds and dividend stocks
Both the equity markets and bond markets will have a tough time dealing with the concept of higher interest rates and perceived inflationary pressures in 2018. We believe that interest rates will track higher, but only marginally higher. Absolute interest rate moves will be small from these current levels.
Valuation is a concern on the equity markets. A good earnings season coupled with synchronized global growth allows the stock market to revalue itself higher. That comes with concerns. “Too much” growth is not desired and will start impacting the bond market in a negative way, which will cause stock market valuations to track lower. That being said, we believe that we’re seeing a correction from an eight-year equity rally and there are sectors, such as pipelines, that are now undervalued and are posed to rally when the bond market settles down.
Avenue believes that BCE is in the best position within the telco space. Although they’re building their fiber to the home (FTTH) network with millions of dollars of capital expenditure, BCE has the ability to build its network and increase its dividends due to its strong free-cash-flow balance sheet. BCE’s free-cash-flow yield is eight per cent. We believe the upcoming spectrum auctions and 5G give legacy telcos an advantage against the cable companies.
INTER PIPELINE (IPL.TO)
Inter Pipeline trades at a discount using price to adjusted funds from operations (P/AFFO). It’s trading below 10 times, but historically it’s traded at 12 times.
This company is unique due to its ability to grow, but at the same time keep its dividend intact. Its contracted toll for transporting oil from the oil sand region gives the company stability due to its take-or-pay contract.
It also has a natural gas liquid (NGL) processing segment for which the company plans to spend $670 million in 2018. $600 million will go to the $3.5-billion Heartland Petrochemical Complex.
LEON’S FURNITURE (LNF.TO)
Leon’s Furniture is one of the few retail stories that’s not been impacted by the digital disruption occurring in retail (that is, Amazon). Leon’s is in a position to increase margins due to its efficiency drive with the now old merging of the Brick. Sear’s bankruptcy will help the survivors of retail, especially appliances where Leon’s dominates. The company will also look to take advantage of their real estate assets which they have on the books at cost.
PAST PICKS: MARCH 28, 2017
- Then: $58.91
- Now: $56.05
- Return: -4.88%
- Total return: -1.40%
- Then: $21.44
- Now: $22.25
- Return: 3.77%
- Total return: 5.26%
BAYTEX 6.625% 2022 - Total return for year was 7%
Total return average: +3.62%
Avenue Bond Portfolio Composite
Performance as of Jan. 31
1 Month: -.60% fund, -0.80% index
1 Year: 0.2% fund, 1.8% index
3 Year: 1.8% fund, 0.8% index
* Index: DEX Universe Bond Index
TOP 5 HOLDINGS AND WEIGHTINGS
- Canada 3.50% 2020: 7%
- Enbridge 3.19% 2022: 4%
- National Bank 2.105% 2022: 5%
- Prov New Brunswick 1.55% 2022: 5%
- Suncor 3.10% 2021: 4%